Technical Analysis: Nikkei Still in Up Wave... For Now

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My firm's Elliott Wave analysis keeps us bullish on Japan, but only insofar as the Nikkei 225 Index (INDEXNIKKEI:NI225) futures hold above 14,100 while Europe appears to be on the path of a fourth wave down.

Last week, the Nikkei pushed the bullish potential to its limits, coming all the way down to test the important 14,100 support that we were watching. As long as price stays above this level, I will continue to favor the blue count, which takes price higher from here in a wave 3.

Although the blue count does not technically get invalidated until the low made earlier this month is taken out, I will have to favor the red count if price heads south of 14,100. The red count would most likely be in the middle of wave iii of 1 to the downside, so if 14,100 is taken out, price is unlikely to stop until the 13,795-13,710 region.

If broken, 14,100 will also act as resistance that price should stay below at all times to see downside follow through. Assuming that support holds, however, then price should be heading up from here in wave i of 3 under the blue count, targeting between 14,500-14,755 in 5 waves.

If currently long, a tight stop would be below last week's low, and a looser stop would be below the 13,750 low.

The Euro STOXX 50 has been the weakest out of the European indices, which is why we took the more bullish count off the chart last week and are only focusing on the ending diagonal potential in red at the moment. Under this count, price should be in wave b of 4, which can still push a little bit higher, but should then lead to a c-wave down towards roughly 2,975 to complete wave 4.

As long as this support level holds, then we can expect a 5th wave to a new high, between 3065 and 3110.

Garrett Patten is a technical analyst and chief educator for ElliottWaveTrader.net, a live trading room featuring Elliott Wave analysis on market indices and stocks. Mr. Patten's focus is primarily on U.S. and international equity indices, and demonstrating the capabilities of unconventional technical analysis. His articles appear on sites including MarketWatch and SeekingAlpha.